Nick Timiraos, known as the 'New Fedwire,' stated that the U.S. economy is unprecedentedly close to a soft landing, with cooling inflation and strong employment, but uncertainties remain regarding the 2% inflation target. Factors such as tariff pass-through, consumer resilience, and AI's impact on employment are becoming key variables in determining whether the 'final mile' will land smoothly. The market is watching whether Kevin Warsh, the successor to the Federal Reserve Chair, will continue to consolidate these gains or pursue aggressive interest rate cuts.
Nick Timiraos, a reporter for The Wall Street Journal who is often referred to by the market as the 'new Fedwire,' pointed out that several key indicators of the U.S. economy are simultaneously showing positive trends. Inflation is cooling, employment remains resilient, and growth is still relatively robust, bringing the possibility of a 'soft landing' closer than ever before. However, it is still premature to draw definitive conclusions.
The latest data reinforces the narrative of 'inflation reduction without recession.' The inflation report released on Friday showed that core prices excluding food and energy rose 2.5% year-over-year in January, the lowest level since the rise in inflation began in 2021. Another report released on Wednesday indicated that the unemployment rate fell back to 4.3% in January, with 130,000 new jobs added, surpassing expectations.
However, the 'beauty' of the data does not equate to mission accomplished. Core inflation remains close to 3%, having rebounded from the low of 2.6% reached last April. Nick Timiraos noted that several analysts expect that after tariff increases are passed on from ports to stores, downward inflation pressures may slow or even stall above the 2% target this year.
The next steps for policy and markets are becoming even more sensitive. Powell's term will end in May, and if the economy remains strong, the White House might push for interest rate cuts. Whether Trump’s intended successor, Warsh, will focus on 'consolidating achievements' or 'cutting rates to pursue loftier goals' could also reshape future policy directions.
The decline in inflation is more like a 'snapshot'; the 2% target has yet to be achieved.
Timiraos noted in the article that the latest core inflation reading was partly influenced by data gaps caused by the government shutdown last fall, which included 'technical reductions.' Nevertheless, it still showed that early this year did not see a repeat of the price pressures that undermined the inflation reduction narrative over the past three years.
Meanwhile, the structure of inflation remains challenging. The report shows that housing costs, previously the largest driver of inflation, have significantly cooled, but service prices outside of housing remain relatively firm, and tariff-sensitive goods prices are accelerating.
Excluding used cars, core goods prices increased at an annualized rate of 4.4% in January, the fastest pace in three years. Analysts believe this also suggests that automakers, after absorbing tariff costs in 2025, have started passing more costs onto consumers.
The concerns of Federal Reserve officials have shifted from 'another spike' to 'staying at elevated levels.' Philadelphia Fed President Anna Paulson stated in an interview last month that she would not declare victory in achieving a 'soft landing,' emphasizing that 'inflation needs to reach 2%; we haven't finished the job.' She predicted that monthly inflation readings would align with the 2% target only by the end of the year.
Employment remains solid, but revised 'low-speed expansion' exposes vulnerabilities.
While the labor market maintains superficial stability, underlying momentum is weakening. Annual revisions show that average monthly job growth for 2025 was only about 15,000, lower than almost all years since World War II except during recessions, with new jobs concentrated heavily in healthcare and education.
Payden & Rygel's chief economist Jeffrey Cleveland stated, 'The worst-case scenario that everyone expected did not occur,' but he also believes that the labor market is 'objectively weak,' and this year’s unemployment rate is more likely to rise than fall.
The stability of the unemployment rate during the reporting period can largely be attributed to companies neither aggressively hiring nor conducting large-scale layoffs, but this 'fragile equilibrium' remains unstable.
Nick Timiraos mentioned that potential triggers include cost-cutting measures, such as layoffs, by companies experiencing significant stock price declines following artificial intelligence reshaping industries.
Resilient consumption serves both as a support and as a hurdle in the 'last mile' of inflation.
Nick Timiraos pointed out that aside from employment, another key risk lies in asset prices and consumption. Household wealth has risen amid years of stock market gains; if there is sustained selling in the markets, consumers may cut spending, thereby weakening the growth engine.
However, some argue that the greater risk for a soft landing comes precisely from excessively strong consumption, which keeps inflation above 2%.
Barclays' chief U.S. economist Marc Giannoni said he feels somewhat uneasy about a 'soft landing' because household finances overall are in good shape, with 'wealth rising across the board.' He predicts that the unemployment rate will drop to 4% this year while inflation will remain around 2.8%, forming a 'mirror image' of Cleveland’s forecast.
Giannoni also noted that the narrative suggesting that a 'K-shaped economy' conceals vulnerabilities among low-income groups due to robust spending by affluent households has been exaggerated. This is positive news for economic expansion but unfavorable for bringing inflation back to 2%.
The叠加 of tariff and fiscal variables, along with the Federal Reserve's transition, amplifies policy uncertainty.
Whether inflation can continue to decline depends on supply-side and policy-side variables. Nick Timiraos pointed out that several analysts expect price increases related to tariffs to gradually pass through the supply chain, limiting the room for inflation improvement this year.
Daleep Singh, Chief Global Economist at PGIM Fixed Income, noted that AI-related capital expenditures contributed nearly one percentage point to economic output last year and may provide similar support again this year.
Singh also mentioned that before the midterm elections this fall, the Trump administration has an incentive to adopt more expansionary fiscal policies and act more cautiously on trade, as significant tariff hikes in April last year have increased cost-of-living pressures. He expects inflation to be around 3% by the end of the year.
Under such a combination of growth and inflation, the 'final stretch' of monetary policy may prove more challenging. While a soft landing appears closer than previously anticipated, it is not yet 'locked in.' As the economy remains strong, the White House's calls for interest rate cuts and the Federal Reserve's commitment to its inflation target could become key variables driving market repricing.
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